National risk assessment reveals major money laundering threats

The island-wide evaluation of money laundering risks in the Cayman Islands has revealed outdated laws and regulations, weak supervision of nonprofits and non-financial organizations, and insufficient international cooperation, according to Francis Arana, the head of the Anti-Money Laundering Unit of the Attorney General’s Chambers.

Mr. Arana presented some of the preliminary findings of the national risk assessment, which has to be carried out by each country under international anti-money laundering rules, at the Anti-Money Laundering and Financial Crime conference at the Marriott resort in Grand Cayman on Thursday.

Mr. Arana, whose role is to ensure that all the relevant anti-money laundering systems are in place, said that many predicate offenses, the crimes underlying money laundering or terrorist finance activity, are committed outside of the Cayman Islands and Cayman is then used as “a layer” or to place funds into Cayman’s financial system.

“That is not to say that we don’t have issues with regards to our domestic crimes and predicate offenses,” he said. But more often, tax evasion, drug trafficking and fraud schemes, including securities fraud, which take place outside of Cayman, would make use of Cayman’s financial system at a later stage. Sometimes this type of fraud was even perpetrated by service providers, he added.

Mr. Arana told the compliance professionals at the conference that the main vulnerabilities uncovered by the national risk assessment included out-of-date laws and insufficient supervision and enforcement.

“We have outdated anti-money laundering, terrorism financing laws … that are in urgent need of updating,” he said, adding that the laws, regulations and guidance notes did not even speak to some of the threats.

“The way that the laws, regulations and guidance were structured did not anticipate the high level of interagency cooperation and coordination,” he said.

As a result, there is weak interagency cooperation and “government agencies are operating in silos,” he added.

“So all that has to change,” Mr. Arana said.

At the supervisory level, Cayman still has significant anti-money laundering gaps, in particular, outside of the financial sector. “We have inadequate supervision at this time, especially for [designated non-financial businesses and professions] and [nonprofit organizations],” he said. “I think this is a big vulnerability.”

Designated non-financial businesses and professions, for instance, include real estate agents, precious metal dealers and other dealers who trade in large value items, as well as auditors, law firms and company service providers.

Mr. Arana noted there is also insufficient understanding of money laundering risks, “but because we have a wide cross section of public sector and private sector individuals involved [in the national risk assessment], that is changing.”

Moreover, the enforcement of money laundering offenses is limited. For instance, the Cayman Islands Monetary Authority has hardly any administrative penalties, he said.

The proposed action plan to tackle these vulnerabilities is to update the relevant laws and regulations and to institute adequate supervision. The Ministry of Financial Services is already working on plans to put real estate agents and precious metals dealers under the supervision of the Department of Commerce and Investment, Mr. Arana said.

There are likely to be self-regulatory organizations for lawyers and accountants, and the supervision for nonprofits needs to be put in place. In addition, “we have to deal with the issue of beneficial ownership” and establish “greater enforcement powers,” Mr. Arana said.

The national risk assessment exists currently only as a draft and will be finalized with consultants from the World Bank who return to Cayman next week.

The complete findings are then expected to be presented to the Anti-Money Laundering Steering Group, chaired by Attorney General Samuel Bulgin, in December.

Under the Financial Action Task Force’s 40 Recommendations on International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation issued in 2012, each country is required to carry out an evaluation of the risks it faces in these areas.

The Cayman Islands has set up a number of working groups that assess national vulnerabilities, industry-specific issues and threats, as well as technical and legal problems. The working groups include about 60 private-sector representatives, in addition to public officials.

The success of the initiative will be tested by the next Caribbean Financial Action Task Force inspection of Cayman’s anti-money laundering regime, which is expected in early 2017.